Shake Shack and the Rising Wages-Rising Prices Infinity Loop

Earlier this week, it was reported that Shake Shack, the fast-casual wing of the Danny Meyer empire, would raise prices at its stores for the third time in less than 18 months. The reason, according to the company, is to accommodate rising worker pay around the country.

“Minimum wages continue to increase and we continue to compensate our teams above those minimums,” the company’s CFO Jeff Uttz said during an earnings call last week. “We intend to continue to offer competitive compensation packages and career development opportunities in order to attract the best talent and to take care of our team for the long-term.”

This progressive-sounding logic explains at least part of why sales at Shake Shack, made out to be one of the Arcadian alternatives to the typical fast-food hamburger chain, continue to boom while more established companies struggle. Being “better” is part of the fast-casual manifesto. A customer pays a few dollars more and waits a little bit longer for food that is usually neither organic nor healthy, but of higher quality than, say, a Wendy’s burger. The food is also prepared and served by employees who make slightly more than minimum wage.

“Shake Shack already pays its Washington, D.C., workers $12 an hour (the city’s minimum wage is $10.50 and will rise to $11.50 in 2016) and its workers in Texas $11 an hour (the state minimum wage is $7.25),” Venessa Wong at BuzzFeed reported.

Nevertheless, tying rising menu prices to increased worker pay seemed to strike a nerve. Amid the laudatory reactions, there was also dissent, which largely enfolded itself within opposition to the efforts to raise the minimum wage and the idea that higher wages will drive the price of everything else up. “Shackflation in Janet Yellen’s America,” one New YorkTimes economic writer quipped.

That’s a threshold that even Shake Shack isn’t close to crossing yet. However, if wages continue to go up and if the novelty of new and growing upscale enterprises like Shake Shack diminishes, rising price points could buck against recent successes and press some consumers to reconsider.

“It forces people to confront what they want,” Dr. Daniel Hamermesh, a professor at the University of Texas who specializes in labor economics. “If you want to have low-wage people paid more, you have to expect that the prices of those products they’re producing are gonna go up. It’s not going to come out of thin air.”

It almost goes without saying that fast food remains so affordable in part because of low labor costs. A recent study by Purdue University suggests that raising the hourly minimum wage to $15 would lead to a 4.3 percent price increase for such restaurants. Would fast-casual restaurants, whose growth has been largely fueled by the willingness of Millennials to pay just a little bit more for everything, alienate their nascent customer base? Hamermesh concedes that some consumers “will be priced out.”

“They’ll have to eat dinners at home or go back to more cheaper fast food,” he added. “No question about that. My guess is that those are people who are right in the middle of the income distribution.”

Contrary to common perception, the biggest consumers of fast food are middle-class Americans. There seems something tragic then about the possibility the fast-casual trend, which markets itself as a more principled alternative to traditional fast food, could become something increasingly out of reach for average consumers. With less than 50 U.S. outlets, Shake Shack may not be the bellwether.

“I can’t imagine that Shake Shack is the tail wagging the entire economic dog,” Hamermesh put it. “It’s not the way the world works.”

Hamermesh also pushes back against the idea that raising the hourly minimum wage for workers at a place like Shack Shake would fundamentally alter the national wage structure. His hypothetical example: Highly skilled workers who make software would not be affected by a minimum wage increase.

But if minimum wage increases continue to take hold, it may drastically alter the way that quick-service restaurants do business. Some argue that minimum-wage increases will eventually force companies to lay off employees and rely more on technology.

Adam Chandler

A few weeks ago, I visited a McDonald’s in Amsterdam featuring touch screens that allow a customer to unhurriedly customize their order—a hallmark of the Chipotle or Five Guys experience—and obviated the need for as many cashiers taking orders in the front.

Earlier this year, when McDonald’s raised wages for all employees in company-run stores, Richard Adams, a consultant and former McDonald’s franchisee, predicted that fewer McDonald’s restaurants will keep late-night hours if wages go up. He also suggested that the fast-food restaurants might abolish their value menus.

“The key to McDonald’s success over the past 15 years has been the dollar menu,” Adams told me. “With higher labor cost that thing will have to go away.”

All of this is what Hamermesh calls “the crucial point” when it comes to raising wages.

“You're not going to get this for free,” he explained. “That somehow we can raise people’s wages to $15 and it’s not going to be passed at least partly through in higher prices. It will be passed at least partly through in higher prices.”

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